For businesses operating in Texas, legislative risk is an important type of risk that needs to be assessed in the context of strategy. The impact of this risk can vary from minor to existential depending on the industry and level of exposure.
What is legislative risk?
Major companies, specifically large public corporations, often list examples of potential legislative risk in their public filings as a warning to investors. For example, a retail establishment like Walmart often lists labor laws as an example of legislative risk. A law to increase the minimum wage, change the way companies provide benefits or otherwise change the rules for employing low-wage workers could alter labor costs for Walmart and therefore affect its profitability.
A company that works in manufacturing might be exposed to the risk of changes in workplace safety laws or environmental protection laws, which could also increase costs. In rare cases, a law could imperil a whole company. For example, states like California have passed laws that require future cars, trucks and SUVs to be fully electric after a certain date. Any company without a fleet of electric vehicles will be unable to operate.
Managing legislative risk
Most companies are too small to affect legislation themselves, so they can’t directly address legislative risk. Instead, they need to monitor potential laws, regulations and rules at the federal, state and local levels. Business legislation that might affect them can be spotted in advance, and the company can make preparations to adapt.
Most legislation has a minor effect on business operations and is addressed on the c-suite level, but managers need to be aware of the potential for legislative risks to be large.